A record feast of offshore renminbi bonds and the shift to a more stable investor base is underlining the Dim Sum market’s maturity with global deposit pools deepening and demand for overseas investment growing.
Growing up fast
Source: REUTERS
A feeder holds a giant panda cub, the only survivor of the triplets giant panda Jiaozi had last August, at the Chengdu Research Base of Giant Panda Breeding in Chengdu, Sichuan.
The offshore renminbi bond market is growing fast as global deposit pools deepen and demand for overseas investments grows.
Sales of Dim Sum bonds, maturing in one year or more, reached Rmb213bn (US$35bn) in the first half of 2014, already comfortably exceeding the Rmb190bn in the full year 2013, according to Thomson Reuters data.
Beyond volumes alone, there are many other signs that the market is maturing rapidly.
The investor base has transformed, with fund managers playing bigger roles than in previous years, according to a research report from BOC International.
Banks dominated new issues in the early years, buying 46% of Dim Sum bonds sold in 2010. That share, however, slipped to 22% in 2013 and stands at 24% for this year to date, according to BOCI. At the same time, investment funds have taken over the leading position, with an average allocation of 49% in 2013.
The two are now close to the long-term average for Asian new issues in the US dollar market, suggesting that the buyer base for Dim Sum bonds has become more stable.
The expanded participation from investment funds is attributable to two sources. The number of overseas renminbi-dedicated funds is rising and even more existing multi-currency credit funds have started to include offshore renminbi bonds as investable products in their portfolios.
“We believe Hong Kong will remain the most favourable avenue for global investors to gain exposure to Chinese currency and credit. Investors prefer to access more liquid markets with diversified issuers.”
The participation of private banks has remained fairly stable over the years, while that of insurance companies has varied. However, the participation of insurance companies has helped to bring out some long-tenor bonds for a market where two- to three-year maturities still dominate.
In the multi-tranche offshore renminbi offering of Rmb2bn from Bank of Communications, Hong Kong branch, sold in both Hong Kong and Taiwan in June, Taiwanese investors took big chunks of all three tranches at 83% of the three-year, 87% of the five-year and 81% of the seven-year. Insurance companies and pension funds bought 66% of the five-year tranche and 74% of the seven-year piece, underlying the popularity of offshore renminbi bonds in that segment, and the merging of Dim Sum and Taiwan’s Bao Dao markets.
Geographically, BOCI also noted that the market was still mainly an Asian phenomenon. On average, 87% of new issues was allocated to Asia, with 8.2% going to Europe, 1.3% to US buyers and 3.1% to the rest of the world.
However, the geographic distribution is gradually improving. For example, America Movil became the first company to target US buyers with a Rmb1bn SEC-registered renminbi bond in February 2012.
This year, as more offshore renminbi centres emerge in Europe and Asia, the market has seen many Chinese banks printing Dim Sum bonds through their European branches, such as those in Paris, Frankfurt, London and Luxembourg.
The latest sizable one was a Rmb2bn bond from the Paris branch of Bank of China, which marked the first Dim Sum bond to have a dual listing in the French capital and Frankfurt.
Anchor orders from high-quality buy-and-hold investors helped to give strong momentum to the bookbuilding process and resulted in a final order book of Rmb7.3bn and over 100 investors for the Paris deal.
Final allocations went to a diversified investor base with strong participation from bank treasuries, insurance companies and corporate buyers, as well as funds and asset managers. European investors accounted for about a third of the offering.
The latest piece of encouraging news was from Switzerland. On July 21, the Swiss National Bank and the People’s Bank of China signed a bilateral swap agreement of Rmb150bn. At the same time, the PBoC granted SNB an investment quota for the Chinese interbank bond market of Rmb15bn.
SNB described the swap agreement as a key prerequisite for the development of a renminbi market in Switzerland and said the investment quota would allow the Swiss lender’s extensive foreign-exchange reserves to be diversified even further.
Swiss appetite for Dim Sum bonds was shown in the country’s 8% take-up of a Rmb750m three-year offering from French automaker Renault in March 2013.
Despite the rise of other offshore renminbi centres, analysts in Hong Kong seem unconcerned about the threat to the city’s status as the world’s leading offshore renminbi base.
“We believe Hong Kong will remain the most favourable avenue for global investors to gain exposure to Chinese currency and credit,” Michele Leung, associate director, fixed income indices, S&P Dow Jones Indices. “Investors prefer to access more liquid markets with diversified issuers.”
In the second half of 2014, HSBC forecasts that a total of Rmb48bn outstanding bonds need to be refinanced, and the full-year projection, including CDs, is around Rmb520bn–Rmb570bn, up from around Rmb371bn in 2013.
Besides frequent issuers, HSBC also expects debut issuers, with backing from first-tier provincial or city governments, to come in the following months, in addition to further supply from banks when various offshore centres start to function.
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